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Understanding and using critical illness insurance

Allen Wastler

Posted on March 28, 2024

Allen Wastler is a former financial journalist with over 30-years of experience, including time at CNBC, CNN, and Knight-Ridder Newspapers.
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Explain what critical illness insurance is and how it works.

List the five major types of illness typically covered by a critical illness policy.

Detail how critical illness insurance can complement major medical coverage.

No one wants or expects a devastating sickness to hit them or their loved ones, but it happens. When it does, emotional strain is often exacerbated by financial strain. That’s where critical illness insurance can make a difference.

This kind of coverage for you or a loved one can provide funds to help cover expenses and, at least in terms of making ends meet, provide some peace of mind when needed most.

What is critical illness insurance?

Critical illness insurance is typically offered through an employer’s benefit plan. It pays a lump-sum benefit directly to an employee when a certain type of disease or condition is diagnosed.

The funds can be used any way the beneficiary chooses — whether it’s treatment expenses left uncovered by health insurance or incidental expenses incurred, like family hotel stays next to a faraway medical facility. (Related: Battling illness and disability)

Even if a diagnosis is terminal, and the funds cannot be used for treatment options, critical illness benefits can still be extremely valuable.

“One of the more touching ways I’ve seen the critical illness benefit used was for a beach house rental for a few weeks,” said Stephen Fox, an expert in critical illness insurance at MassMutual. “It was an end-of-life situation, but this allowed for family and friends to come together, share stories, and just be with their loved one in one of her favorite locations for the last time.”

What illnesses are covered?

Most critical illness policies cover what are often referred to as the “Big 5” dreaded medical conditions. They are:

  • Cancer
  • Heart attack
  • Stroke
  • Kidney failure
  • Major organ failure

Other conditions may also be fully covered, depending on the terms of the policy offered by the insurance carrier. These may include:

  • Paralysis
  • Loss of sight
  • Hearing loss
  • Coma
  • Advanced Parkinson’s disease
  • Motor neuron disease
  • Occupational HIV (for certain industries)

And other conditions or procedures, depending on the terms offered in the critical illness policy, may qualify for a partial benefit. These can include:

  • Angioplasty
  • Coronary artery bypass
  • Cancer in situ
  • Skin cancer (some states)

Even more medical diagnoses and conditions may be covered, depending on the terms of the policy offered in an employer’s benefit program.

Why critical illness insurance may be needed

Many people have health insurance or major medical insurance through their employer. But often there are expenses and costs that aren’t covered.

For instance, out-of-pocket expenses — deductibles, copayments, coinsurance obligations — can be substantial depending on the health insurance plan.

Additionally, out-of-network care may not be fully covered by a particular health plan but nevertheless preferred by an individual. Some of the best cancer care facilities, for example, are out-of-network for many health plans. And surcharges are sometimes applied for specialty hospitals. (Related: Young adults and cancer costs)

Other gaps in health insurance or major medical insurance can include:

  • Second opinions
  • Experimental or nontraditional treatments
  • Travel expenses
  • Drug formularies

Then there are costs associated with illness but not directly related to treatment. For instance, there may be a loss of income because the main breadwinner is ill or has to take care of a loved one who is ill. That, in turn, could lead to a day-to-day cash flow need and having to borrow money or tap retirement savings, both of which have costs. Other costs could include:

  • In-home care
  • Hospital advocate or medical counselor
  • Home or car modifications

In the face of medical costs and associated expenses, many families fall short. Indeed, one study published in the American Journal of Public Health in 2019 found that 66.5 percent of bankruptcies were due to being unable to pay high medical expenses or lost income due to illness.

Getting critical illness coverage

As noted, critical illness coverage is typically offered through employer benefit plans. That means payments can be handled through paycheck deductions. Some employers may even pick up part of the cost.

In most instances, coverage can be purchased for dependents and, depending on the terms of the policy, the coverage may be portable, meaning you can take it with you if you change jobs and leave your current employer.

Ask your Human Resource Department or supervisor about critical illness coverage. It can be an important resource should you suffer trying times.

Discover more from MassMutual …

How to set up an emergency fund

What to do when facing a financial emergency

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The information provided is not written or intended as specific tax or legal advice. MassMutual and its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.